My Response to Duncan Webb’s article on the Gaps between EQC and insurance obligations

October 1, 2013 by Sarah-Alice Miles 7 Comments

This blog uses as its base an article written by Duncan Webb on Stuff (see http://www.stuff.co.nz/the-press/opinion/9224350/Gaps-between-EQC-insurance-obligations). I wrote a comment on the bottom of his article which the Press would not print it so I will put it here.

It seems to me that the main issue is the interpretation of ‘reinstatement‘ and reconciling the:
1. Earthquake Commission Act 1993;
2. Individual Insurance policies which in the main state that a property should be brought back to a condition ‘as new’ and;
3. The DBH ‘Guidelines’.
There are several sections in the EQC Act 1993 that are of relevance including sections 2, 18, 22, 27, & 30 for those of your who wish to look at the legislation for yourselves. But here I will concentrate on Schedule 3 of the EQC ACT 1993, which states:

9 Replacement of property
• (1) The Commission may at its option replace or reinstate any property that suffers natural disaster damage, or any part thereof, instead of paying the amount of the damage, but—
• (a) the Commission shall not be bound to replace or reinstate exactly or completely, but only as circumstances permit and in a reasonably sufficient manner; and
• (b) to the extent that the damage is to residential land and consists of or results from ground-forming materials or other debris on the land (including as a consequence of a natural landslip), the Commission shall not be bound to replace or reinstate other than by removal of the debris.
(2) If the Commission elects to replace or reinstate any property or wishes to consider whether it shall so elect, the insured person shall furnish the Commission with such plans, specifications, measurements, quantities, and other particulars as the Commission may require. No acts done or caused to be done by the Commission with a view to replacement or reinstatement shall be deemed to be an election by the Commission to replace or reinstate.

In my opinion s27 also makes it clear that EQC uses Schedule 3 as the justification for the use of the DBH Guidelines in the repair to properties. Upon closer reading of the EQC Act, where the property is found to have damage which is below the EQC caps, the Commission is entitled to enforce the Schedule 3 qualifications – which, in this instance, clearly include the DBH Guidelines.
If the damage is over cap then under s30 (3) of the Act – the wording and standards associated with the homeowner’s insurance policy apply – in most cases, this will be to the ‘when it was new standard’.
Consequently it would appear that the EQC Act is designed to offer a lesser level of damage repair to under cap properties and hence settlement. This also explains why there is so much pressure put on the industries working for EQC (engineers, quantity surveyors et.c.) to ensure the damage assessments fall under the cap because then the level of repair is to a lesser standard and the insurance liability is also less. It is also an explanation as to why there has been so much manipulation of the apportionment process – EQC and the private insurers have been in many cases, negotiating amongst themselves to achieve a situation whereby the properties always fall under the ‘caps’ – which means that the DBH Minimum Building standards can be justifiably used. This probably requires a legal challenge – and is perhaps, a perfect legal class-action scenario.
The question then becomes ‘is it reasonable that a Government has carefully manipulated its liability in terms of the kind of repair response post disaster that it will offer? Particularly that it has done this ‘after the event’! And it will continue to produce DBH Minimum Standard Guidelines. It smacks of doubtful and downright dishonest behaviour as the Government attempts to save itself money. Suddenly we find a situation in which insurers and EQC start negotiating the apportionment of damage per event. I have heard of many people who submitted more than one claim but have been told by these bodies that they have only one claim now, despite having lodged three. I myself have evidence in my own file of EQC and the private insurers negotiating amongst themselves as to which percentage of damage they would rather have apportioned to which event. Why are they doing this you ask? Well quite simply, where they can keep the damage under the EQC cap their liability for the repairs is considerably less – it saves them big bucks. Yet again it is the homeowner who is cheated.

Insurance Policy Wording
Where the insurance policy states that the building must be reinstated to ‘a condition as similar as possible to when it was new’ (or similar wording), a reasonable Court should interpret this in a clear manner, excluding the provisions made in Schedule 3 of the EQC Act 1993 – which also then excludes the DBH Minimum Standard Guidelines.
The statement in the document on ‘status’ of the MBIE document ‘Guidance: Repairing and rebuilding houses affected by the Canterbury earthquakes’ makes it clear that ‘ While the Ministry has taken care in preparing this document, it is only a guide and, if used, does not relieve any person of the obligation to consider any matter to which that information relates, according to the circumstances of the particular case’. We can safely assume, in my opinion, that a pre-existing insurance contract would be a ‘matter to which that information relates’ and would override the minimum standard guidelines.
Case law will ultimately determine that standard. But based on what we have seen in cases such as Turvey the Court has indicated that it has to be to the ‘when it was new’ standard.
(See https://thechristchurchfiasco.wordpress.com/2013/04/07/turvey-trustee-v-southern-response-earthquake-services-limited/) and the O’Loughlin cases (See https://thechristchurchfiasco.wordpress.com/2013/04/21/oloughlins-v-tower-insurance-limited-summary-of-findings-relating-to-the-red-zone/),

DBH Guidelines
The DBH Guidelines are therefore not consistent with the provisions of:
a) most insurance policies which require the building to be reinstated to ‘as when new’; or
b) Standard building ‘best practise’ within the licensed building practitioner obligations; nor
d) the Building Act 2004.
But they are consistent with Schedule 3 of the Earthquake Commission Act 1993 (See http://www.legislation.govt.nz/act/public/1993/0084/latest/DLM305968.html primary definitions). However they arguably do not override the Insurance policy wording once the damage is over the EQC threshold. Hence the guidelines had to state that the solutions are not mandatory as they do not override the provisions of our insurance policy.
When the size of this insurance ‘fraud’ is finally realised by the affected population, I suspect that the ramifications will be both political and legal.
There are also some interesting questions around the complicity of the Professional societies/institutions involved in the generation of the guidelines.

Simon Munro of law firm Anthony Harper has stated that “I do not agree with Duncan’s views regarding EQC’s obligations under the Earthquake Commission Act 1993.

The “as new” standard is set out in the Act (in paragraph (a)(ii) of the definition of “replacement value” in section 2 of the Act, which must be read in conjunction with section 18 of the Act). The part of the Act that Duncan refers to (taken from Clause 9 of Schedule 3 to the Act) appears to be relied on by EQC to the exclusion of sections 2 and 18, and as a general description of their obligations (which should only be applied if circumstances do not permit exact or complete reinstatement).

It is a fundamental principle of statutory interpretation that an Act must be read as a whole, and when the Act is read as a whole (rather than the words in Clause 9 of Schedule 3 being taken in isolation) our view is that:

1. The standard of repair provided for in the Act requires EQC to replace or reinstate the building to a condition substantially the same as when it was new, modified as necessary to comply with any applicable laws. The costs in doing so must be reasonably incurred.

2. The Act also contemplates circumstances that do not permit exact or complete reinstatement. This might arise, for example, where building materials or methods have evolved, or where products are no longer available, or no longer comply with current building standards. In such circumstances the Act states that EQC is only bound to replace or reinstate as circumstances permit and in a reasonably sufficient manner.

This is untested in the courts, and is therefore one of the issues that we are looking to resolve in bringing a group action against EQC.”

This is another view point. Not one I agree with. I think our Government knew what it was doing when it drafted the legislation and I know that Mr Gerry Brownlee sees the DBH Guidelines as sitting quite comfortably with the legislation. But there are many ways to skin a cat – either legal challenge is worth a go in my opinion.